The provinces get it: Carbon pricing can be simple and efficient

Note: This post originally appeared in The Globe and Mail. It has been reposted here with permission from the author.

Globally, some 40 national jurisdictions have implemented, or are scheduled to implement, some form of carbon pricing to combat climate disruption. Carbon pricing unleashes market forces to lower greenhouse gas emissions. Instead of governments picking solutions, the market does.

Markedly absent are Canada and the United States. What to do about recalcitrant national governments? Go around them. Oregon, California, Quebec, British Columbia and Alberta all moved ahead in the absence of national leadership. As more sub-national jurisdictions stitch together complementary carbon markets, the ability to define climate policy is snatched away from national capitals.

Enter Ontario and Quebec. On Monday, Ontario Premier Kathleen Wynne announced that Ontario would adopt a cap-and-trade plan to help battle climate change, in preparation for Tuesday’s summit of premiers in Quebec City.

Having planted a stake in the ground, Ms. Wynne and the premiers have taken charge of the climate file and are indirectly setting Canada’s federal climate policy for decades by establishing the rising role of sub-national governments in the fight against global warming.

Ontario, however, can learn from experiences in British Columbia and Quebec.

B.C.’s carbon tax is simple, transparent – and works. Carbon is priced at the source – gas pump, electrical power plant. The cost percolates through the economy. The money raised lowers corporate and income tax. Since its inception in 2008, emissions are down nearly 20 per cent compared to the rest of Canada, while economic growth has been slightly higher. There’s good reason the Economist called it “a winner” that “woos skeptics”.

The key lesson is we can reduce carbon emissions without broad economic harm. The reductions over just six years are roughly equal to Canada’s 2020 reduction targets, and would have been more than enough to satisfy the Kyoto deal that Prime Minister Stephen Harper threw under the bus.

That it was revenue-neutral won over many on the political right. It’s an easy sell: more tax on what you don’t want, less tax on what you do. B.C. now has the lowest fuel use in the country and the lowest income tax rate. It’s hard to undo – subsequent governments have to increase the taxes lowered by carbon pricing.

The lessons are clear: carbon pricing can be simple and efficient. Initial emission cuts emissions – say, up to a quarter – come with little economic pain. And since it’s still popular, it doesn’t have to hurt politically.

Quebec went with “cap-and-trade”. Emitters trade the right to emit greenhouse gases with other companies under a decreasing total cap. That cap can be sensitive to an industry’s profile – cement factories, for example, cannot reduce emissions the way the energy sector can. Companies hunt (trade) for the lowest cost incremental emissions reduction across a broad market. Quebec’s carbon market is linked to California under the Western Climate Initiative (WCI). That market is sure to grow in coming years – including Ontario.

Large emitters prefer cap-and-trade because they can look beyond their own operations to find lowest-cost emissions reduction elsewhere. Bigger markets are more cost efficient. If a state-of-the-art Quebec factory finds it cheaper to retrofit a factory in California, they can pay their American counterpart to upgrade.

Critics correctly point out that emitters can effectively subsidize foreign companies’ reductions instead of lowering their own. But for an individual company facing ever-steeper cuts, against competitors in more lax jurisdictions, it might be the only way to stay in business in Canada. Export-oriented industries are particularly vulnerable. Once the early, easy reductions are done – B.C. style – the option to trade across borders enables companies to remain competitive.

There are other ways to gain economic benefit from carbon trading. Canada has a lead on low-carbon technology – thanks in large part to Sustainable Development Technology Canada’s (SDTC) fund. Why not link Canadian technology purchases to retrofits paid for by Canadian industries, through Export Development Canada?

It’s critical to ensure no-one games the system. Europe gave away too many emissions credits at the outset, causing a price collapse. Industries that knew cap-and-trade was coming avoided scheduled upgrades figuring (correctly) they’d only get credit if they do it later. Some power plants artificially cranked up emissions in order to have a higher initial cap. With the benefit of hindsight we can avoid these pitfalls.

A hybrid system brings the best of both worlds. For the short term, it’s hard to argue against the success of B.C.’s simple market signal. The more politically palatable revenue-neutral option is likely, but it’s not unreasonable some portion be put into a climate adaptation fund or be used to spur more investment in the clean energy sector.

Ontario’s signal that it prefers WCI’s cap-and-trade makes sense over the long-term. As reductions get much steeper – which they must in decades to come – Ontario’s large industrial emitters, particularly those reliant on exports, need cap-and-trade’s flexibility. Ontario’s participation in WCI will attract other North American jurisdictions, and may build enough market heft to link large developing world markets like China and India.

Ontario’s carbon move will not just set the stage for Canada. It means Canadians can have real influence at COP21, the critical next climate negotiations in Paris – despite our federal governments ongoing recalcitrance on climate. As goes Ontario, so might the rest of the world.